Winding Up a Corporation in Canada: Dissolving It Properly

A corporation does not stop existing because you stopped using it. It keeps its filing obligations, keeps accruing penalties for missed returns, and keeps its directors exposed, until it is formally dissolved.

Walking away is the most expensive way to close a business, and it is what most people do.

Eight steps, from settling debts to applying for dissolution

Doing these out of order creates work. Doing them in order is straightforward.

1. Stop operating and settle up. Collect receivables, pay creditors, cancel leases and subscriptions, terminate employees with proper notice and final pay.

2. Deal with the assets. Anything the corporation owns must be disposed of or distributed. Both are taxable events to the corporation at fair market value, even if you simply take the equipment home. That triggers recapture where you have claimed more capital cost allowance than the asset actually lost.

3. Clear the shareholder loan. If you owe the corporation money, it must be repaid or characterised as salary or a dividend before the corporation ceases to exist. Leaving it produces a personal income inclusion at the worst possible time. See shareholder loans.

4. File the final payroll and GST/HST returns. Final T4s are due within 30 days of the business ending, not at the usual end-of-February deadline. A final GST/HST return is due within a month of closing the account for most filers. Note that closing a GST/HST account can trigger a deemed disposition of remaining assets for GST/HST purposes, with tax payable on them. That is the single most commonly unbudgeted number in a wind-up, because it falls due on property you still hold rather than on anything you sold, and it is worked through in GST/HST when you close a business.

5. Distribute what remains to shareholders. Usually as a dividend, sometimes as a return of capital. The characterisation changes the personal tax outcome materially and is worth getting advice on when the amounts are meaningful.

6. File the final T2 return. For the short year ending on the dissolution date, marked as the final return.

7. Close the CRA program accounts. RT, RP, RC and RZ, each closed deliberately. An account left open keeps expecting returns, including nil ones. See the business number.

8. Apply for dissolution with the incorporating jurisdiction, federally through Corporations Canada or provincially.

Dissolution requires the CRA to be satisfied

You generally cannot dissolve a corporation that owes the CRA money or has outstanding returns. Certificates and consents are required depending on jurisdiction.

So the sequence is not optional: settle, file, then dissolve. Attempting dissolution first simply fails.

What happens if you just stop

The director liability line is the serious one. Unremitted payroll deductions and GST/HST are trust amounts, and a director can be personally assessed for them. That exposure does not disappear when the corporation stops trading, and in most circumstances runs for a period after you cease to be a director. See director liability.

Empty the tax accounts before you empty the bank account

Two balances sitting inside the corporation are worth real money and both are extinguished on dissolution if nobody uses them. This is the step that separates a wind-up done properly from one done in the right order but for the wrong amount.

The capital dividend account. Where the corporation has realised capital gains, received life insurance proceeds, or holds certain other amounts, the non-taxable portion sits in a notional capital dividend account. A private corporation can elect under subsection 83(2), on Form T2054, to pay that balance out as a capital dividend, tax-free to Canadian-resident shareholders. The election has to be filed on time and the balance has to be computed correctly, because an excessive election attracts its own penalty tax. Distribute the surplus as an ordinary dividend without checking the account first and you have paid tax on money that could have come out clean.

Refundable dividend tax on hand. A CCPC that earned investment income paid extra tax on it, and recovers part of that tax only when it pays a taxable dividend. The balance is recovered through the dividend refund and is otherwise lost. If the corporation has an RDTOH balance, the final distribution should be structured as a taxable dividend large enough to trigger the refund rather than as a return of capital. The mechanics are in refundable dividend tax on hand.

Work out both balances before deciding the form of the final distribution, not after.

Dissolution or dormancy?

Sometimes keeping the corporation alive but inactive is right: you expect to use it again within a year or two, or it holds something worth keeping.

A dormant corporation still files a T2 every year, still files annual returns with its jurisdiction, and still costs accounting fees. Budget a thousand or so annually to keep an empty company breathing.

If you have no concrete plan to use it, dissolve. Revival later is possible and usually cheaper than years of dormant filings.

The tax cost of closing

Three things commonly surprise people:

Recapture on assets. Sell or distribute equipment for more than its remaining class balance and the excess is income to the corporation. A well-maintained vehicle is the usual culprit.

The final distribution is taxable to you. Money coming out of the corporation is a dividend or a deemed dividend in most cases. The corporation closing does not make it tax-free.

Losses die with the corporation. Non-capital losses carried forward are lost on dissolution. If the corporation has meaningful loss carryforwards, that is a reason to look at alternatives before dissolving.

The paperwork to keep

Keep the corporate records for six years after the end of the final tax year, and longer for anything relating to property. The obligation survives the corporation. The CRA can still ask, and “the company no longer exists” is not an answer.

The whole wind-up sequence in one paragraph

Settle debts, dispose of assets, clear the shareholder loan, file final payroll and GST/HST returns, distribute the remainder, file the final T2, close every program account, then dissolve with the jurisdiction. In that order.

If you have a corporation you stopped using some years ago and have not filed since, that is a fixable situation and it gets more expensive every year left alone.